I have money in a S&P Index Fund (VFIAX specifically). How do I know if my index fund is compounded? Furthermore, at what intervals is it compounded?

And more importantly, should it be compounded? Does the way I have it setup work best?

This is how it's set up right now:

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    Can you explain what you mean by "compounded"? Stock funds don't earn interest like savings accounts, so the term doesn't really make sense. My guess is that the fact that you're reinvesting dividends and capital gains is the closest thing to what you might be thinking of. Commented Oct 17, 2017 at 4:32

1 Answer 1


When we talk about compounding, we usually think about interest payments. If you have a deposit in a savings account that is earning compound interest, then each time an interest payment is made to your account, your deposit gets larger, and the amount of your next interest payment is larger than the last. There are compound interest formulas that you can use to calculate your future earnings using the interest rate and the compounding interval.

However, your mutual fund is not earning interest, so you have to think of it differently. When you own a stock (and your mutual fund is simply a collection of stocks), the value of the stock (hopefully) grows. Let's say, for example, that you have $1000 invested, and the value goes up 10% the first year. The total value of your investment has increased by $100, and your total investment is worth $1100. If it grows by another 10% the following year, your investment is then $1210, having gained $110.

In this way, your investment grows in a similar way to compound interest. As your investment pays off, it causes the value of the investment to grow, allowing for even higher earnings in the future. So in that sense, it is compounding. However, because it is not earning a fixed, predictable amount of interest as a savings account would, you can't use the compound interest formula to calculate precisely how much you will have in the future, as there is no fixed compounding interval.

If you want to use the formula to estimate how much you might have in the future, you have to make an assumption on the growth of your investment, and that growth assumption will have a time period associated with it. For example, you might assume a growth rate of 10% per year. Or you might assume a growth rate of 1% per month. This is what you could use in a compound interest formula for your mutual fund investment.

By reinvesting your dividends and capital gains (and not taking them out in cash), you are maximizing your "compounding" by allowing those earnings to cause your investment to grow.

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